How should you plan for your financial future?
Conventional thinking says to look at your current salary then it says that in retirement you need some larger-or-smaller percentage of that salary to live on – some people say that you need just 50% to 70% of your pre-retirement salary in retirement … others say 100% to 120% – hence you need a certain lump sum invested in a certain way to produce that weekly or monthly withdrawal.
Now, this may produce the RIGHT result for SOME people, but I believe that any resemblance to what MOST PEOPLE would want to retire on is purely coincidental.
Here are two examples – obviously extreme – to illustrate:
1. Less is more
Let’s say that you like surfing … in fact, if to surf every day and just ‘be one with the waves’ is your Life’s Dream, then, I say “go for it!” …
… Go ahead and cash in your 401k and other assets now, move to Byron Bay (Australia) and you can pretty much live the rest of your life on the beach, living off government handouts.
Plenty of people are happily living this ‘dream’ right now …
Requirement: 0% (give or take) of your current salary
2. More is more
In 1998 I had the audacity to imagine a life where I could be ‘free’ to travel physically, mentally, and spiritually … I costed this life in terms of:
(a) Time – I would need to retire within 10 years so that I would be free to travel where and when I liked,
And …
(b) Money – I would need about $250k a year in PASSIVE INCOME, indexed for life … my dream didn’t say that I couldn’t travel Coach!
The only problem, in 1998 I was running a struggling business employing 5 people, losing $5k a month, $30k in debt, drawing only $50k a year, and my wife still had to work … what’s more the business had been running that way for 5 years!
Requirement: 500% (give or take) of my (then) current salary
The outcome for me was positive (I didn’t just pick the name of this blog out of thin air!), I firmly believe BECAUSE I had a Big Dream. My challenge is now to shift from aiming towards it to actually living it.
But, the point here is that your LIFE should dictate your finances, not the other way around … dream first …
… only then, financially plan accordingly.
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I totally agree with you. I woudl much rather set a financial target of making a million and miss it by 20% than make a financial target of making a thousand and miss it by 20%. I think that the more ambitious we are the more we can achieve. By having a great goal we will feel more motivated – I know I would rather put the effort in if I am aiming for a million than if I am just aiming for a thousand.
Totally agree. “Think and Grow Rich” right? Most people that I talked to don’t even have any clues about their financial picture and ultimately what they want to do in your life. Did I forget to say “most”? One thing though, the journey is hard and it gets worse when you have a family to feed and other dependencies. Being young and debt-free definitely helps. The older you get the harder it is to be risky but on the other hand, you have (hopefully) more money and become wiser with a larger connection of people. I rather be young and work hard now than be old and trying to play catch up.
My magic number: $4000 a month (after-tax) will do it. Life in America is boring and mechanical so I rather be somewhere fun and warm, like home … Vietnam. I’ll be much happier there for sure. Option 1 and 2 combined.
I tend to agree; keep the dreams big. Alex Le – good call on living in Vietnam with 4k per month. With that kind of money you could certainly live like a king! I’ve been there and made it pretty comfortable on 2k for the whole month! Good dream!
@ Rachel – My spam filter locked you out for some reason, hope you’re legit! 🙂 Now that we’ve got that out of the way, why not miss $10 Mill. or even $100 Mill. by 10% !!
@ Alex – You should be able to live well on $4k/mth in Vietnam … just remember that is still $48k / year or $1 Mill. – $2 Mill. in passive assets returning 2.5% – 5% after inflation, assuming that you choose NOT to work.
I’ll talk about what to do if you DO choose to work post-‘retirement’ in an upcoming post.
@ Hank – Thanks!
Hank,
It’s awesome that you visited Vietnam and stayed there for a long time. Did you stay in Hochiminh city or Hanoi? I’m from Hochiminh and to me, the city is just amazing and fun, especially when you ride the motorbike and feel the wind blowing by your ears. Since the currency is cheap and living standards are low, $4,000/month will go a loooooong way.
AJC,
I don’t plan on quitting working anytime soon. My “retirement” is to retire from working 9-5 and work for myself. I wouldn’t call that work since I know I will enjoy it, if not, I can always pick a new thing to work on. Life is simple and fun if you have more choices right?
BTW, let me know about your RoR project, I’ll be more than happy to discuss with you. There’s money to be made here 🙂
@ Alex – It’s my thesis that one day working will no longer be fun, for any of us … if you agree that it’s possible that you will one day feel the same way, too, then it’s your job NOW to decide WHEN that will be, WHAT you’ll be doing instead of working, and HOW MUCH it will cost to do it – and, if you’re no longer earning money, WHERE will it come from?
AJC,
I totally agree with you. There will be a time when any working at all is not acceptable. I read “You Life or Your Money” and the book basically points out that everyone of us is trading our life energy for money. At some point, no matter how much money you can make, it’s not worth any second of your life to spend on “working”. But only if you can afford it.
I don’t know when that moment is, but I know my number (thanks to you), and when I am to quit the so-called “working”. Where would the money come from? From all the preparations and sweats now.
I went to Startup School last year in San Jose. I had the chance to talk to quite a few interesting people. Paul Buchheit for one. He wrote Gmail and the initial prototype for Google Adsense, was the 20th employee, came up with “Don’t Be Evil” slogan. He quit Google shortly after the IPO and he is a big time millionaire. It was lunch time and I had the chance to talk to him while waiting. I asked him what he was working on at the time. He said he would keep secret (probably it was friendfeed.com), and asked me what I was doing. I said I was working to pay the bill. We both laughed. I suddenly realized that he was in a totally different world than I and the rest of the world. He probably never have to pay for a “bill” again. The guy is truly wealthy with all the stock options and stuff. And he is extremely nice, and rich.
I don’t know what the moral of this story is, but every time I think about it, there’s an urge inside me, telling me that I want to be in Paul’s position one day. Be an entrepreneur, successful, and wealthy. This is my true calling and I think it’s the meaning of my life.
@ Alex – Being “an entrepreneur, successful, and wealthy” is a means to an end … what end? Only you know … or, need to find out! Good luck! AJC.
I agree – the idea of “retirement planning” – multiplying your current income by some factor and an inflation adjustment and then working back to how much you have to save is so short-sighted. On the other hand, some people set impossible goals that require impossible rates of return given their resources and then take risks that are too big, lose all their money and fail. I see these guys trading options or stocks etc. on the web a lot. They decide they must have X-million within five years or whatever and then just blow up and have nothing. Somewhere, there is a golden path where the risk needed is not too high but the amount accumualted is not kept artificially depressed by a savings budget.
@ Moom – If you have an amount that is a MUST for you because of who you ARE and who you MUST BECOME, perhaps no risk is too great?
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